Hot money continued pouring into the mainland in the three months to September, though the direction has reversed in the past couple of months.

Short-term foreign debt, a gauge of hot money inflow, rose almost 10 per cent to US$507.6 billion at the end of September from US$462 billion in June, the State Administration of Foreign Exchange said yesterday.

Foreign debt in general rose to US$697.2 billion at the end of September from US$642.5 billion three months earlier.

The SAFE said a sharp rise in trade-related credit, such as loans provided by overseas sellers to domestic buyers and payment in advance made by overseas importers, contributed to the increase, not speculative capital flows. 'Rising foreign debt won't affect China's debt security,' the SAFE added.

The inflow of hot money, which generally refers to liquidity that chases short-term returns through property, stocks or currency, complicates effort to fight inflation, by boosting liquidity and driving up asset prices. Any sudden pullback runs the risk of triggering currency depreciation, market volatility and an economic crash, economists said.

The country has been witnessing capital outflow since October as investors became more risk-averse because of the European debt crisis and the rising uncertainty over the mainland's economic outlook.

Liu Shengjun, deputy director of the China Europe International Business School's Case Centre in Shanghai, said: 'The growing risks of a hard landing in China have led to a sudden rise of hot money outflow, and the trend could continue into 2012. However, if the US were to introduce more quantitative easing, hot money inflow could increase again, depending on the state of the economy.'

Foreign exchange purchases made by the country's commercial banks fell for a second consecutive month in November, an unprecedented development, economists said. After increasing by an average of 325.8 billion yuan (HK$400 billion) in the first nine months, purchases saw a net reduction of 27.9 billion in November and 24.9 billion yuan in October.

Since Beijing de-pegged the yuan from the US dollar in July 2005, the monthly average net increase has always been around 256 billion yuan, said Qu Hongbin, HSBC's chief China economist, in a report.

Taking into account a decline in foreign direct investment in November and a smaller but still sizeable trade surplus, the net reduction of forex purchases by commercial banks implies a hot money outflow of US$28 billion in November and US$29 billion in October, Qu said.

The mainland experienced hot money outflows in the past just twice, he said. One was in late 2008 and early 2009 during the financial crisis and the other in 2010, when there were renewed concerns about a global double-dip recession.

Qu said the rising outflows, combined with a significant shrinkage of the current account surplus, should reduce pressure on yuan appreciation.